Ed Wesemann

Consultant and Advisor

We estimate the overall Texas legal market (the total paid for private practice legal services) as being approximately $17.1 billion, the third largest in the U.S. following New York ($39.8b) and California ($36.8b). This provides statewide revenue per lawyer of $227,194 compared to the national average of $215,701. The state has 75,087 practicing lawyers, which amounts to 330 people per lawyer, compared to the national average of 260. Texas is the state with the second highest population after California.

By metropolitan area, the legal markets in Texas break out as follows (in millions):

The Texas overall legal market has been growing at a rate of almost 12 percent annually and after a comparatively small hiccup in 2009, there is every reason to believe that rate will continue or increase. Since 1995, the state’s employment performance has been growing at a rate of 15 percent above the U.S. average and the Gross State Product has increased by almost 40 percent since 2003, even with the slowdown in 2009.

Strengths

High population growth. Texas has been experiencing an average net population growth of 250,000 annually, among the highest in the country. The growth is due to high employment growth and a low cost of living.

Economic performance. The downturn in Texas was milder than that seen in the South or the U.S. as a whole. Some of this was driven by housing –Texas’ housing dip was comparatively small because the state never experienced a price boom at the level of other “sunbelt” locations. Also, the strong population growth supported demand for consumer-related industries. Overall, Texas’ historic experience of being “early in and early out” of recessions should continue, making an early recovery more likely.

High industrial diversity. The U.S. Department of Commerce ranks industrial diversity in Texas among the top 15 percent of states. The shift from energy, cattle, real estate and banking as the traditional pillars of the economy to the growth of employment with high tech companies like Texas Instruments, Samsung and Dell will support recovery.

High risk adjusted reward. Underwriters calculate the reward/risk for the state at 1.16 percent for the period through 2014. The Department of Commerce lists the Vitality of the state at 111 percent (100 = U.S. average) and the Cost of Doing Business at 98 percent.

Weaknesses

High economic volatility. The reaction to economic changes is 9 percent higher than the U.S. average.

Low income. Household and personal income is below the U.S. average.

High economic dependence. Despite the growth of economic diversification, Texas remains strongly dependent on oil and gas industries and military bases and suppliers.

Competitive Legal Market

The good news about Texas is that, despite the presence of strong law firms, it is a relatively open market compared to other states of its size. There is an overall 80 percent bar exam pass rate and lawyers with at least 5 years of practice can be admitted without exam. Yet, the state has not become the magnet for out-of-town law firms that one would suspect – only 26 have opened offices in Texas.

While there are four distinct major legal markets in Texas (Houston, Dallas, Austin and San Antonio), the presence of locally headquartered firms in multiple cities and the ease of routinely moving lawyers among cities through excellent intra-state air transportation, makes the state function, in many ways, as a single marketplace. As the chart of the market demonstrates, there is a distinct first tier with three dominant firms with one firm straddling the top two tiers. The chart is a summary of our proprietary analysis of overall reputation including individual lawyer recognition and perceptions of quality, and the number of lawyers located in Texas. The percentage is the proportional reputation compared to the firm with the highest reputation.

Dallas

Rated as one of the fastest growing cities in the next five years for both population and employment, Dallas enjoys a below average cost of living and cost of doing business. Although Houston has an even higher potential for growth, its fortunes are tied to energy, whereas Dallas has a more diversified economy involving finance, international trade, cattle, regional distribution and energy; sustains high legal hourly billing rates (for a non-capital market city); is surprisingly under-lawyered compared to much of the country; and has a sufficient spread of strength among a number of powerhouse law firms to keep the market competitive.

At the same time, Dallas, either by entrepreneurial climate or the temperament of its lawyers, has traditionally been incapable of creating and maintaining a large global firm. Firms reaching this level seem to implode and only Akin Gump seems to have escaped by moving its headquarters to Washington.

Nevertheless, we find Dallas to be our number one choice as the best location in the U.S. for law office expansion.

Austin

The success of Dell Computer and the desire of University of Texas grads to stay in the city have put together a winning combination of “Dellionaires” with available capital and a highly educated workforce. The result is the consistent rating of the city among the best places to start a business and to live. Austin is projected to be in the top ten cities in the U.S. for population and job growth but, despite the arrival of outposts by national firms ranging from DLA Piper to Wilson Sonsini, the city remains under-lawyered for its potential growth, which should be huge in a recovering economy. It is probably safe to expect huge growth over the next couple of years in Austin’s ties with law firms in R&D centers like Boston, Columbus, and the Silicon Valley.

Houston

It is hard to knock a metropolitan area that ranks first in the country for both population and employment growth over the next three years. But Houston has some issues worthy of concern. Despite moves to increase industrial diversity, Houston is as close to a one industry town as one can find in a major metro area. The result is economic volatility that is 16 percent more reactive to national events than the U.S. average. Houston’s net population growth is 74 percent foreign and primarily Hispanic, providing limited growth influence on the demand for sophisticated legal services for businesses. Most importantly, the dominance of the state’s three firms in the Houston market, supported by a strong and growing second tier, makes the city less receptive to outside law firm penetration than Dallas and Austin. Houston would be a tough place to open a law office in the next couple of years.

San Antonio

While San Antonio is growing and has a relatively large volume of legal services, the city is heavily dominated by military facilities and suppliers, spinning off a small amount of legal business. It is an extremely inexpensive place to do business (79 percent of the national average) but San Antonio is plagued by poor underlying demographics (educational level and average income). The law offices of Texas firms located in the city are largely to facilitate the desires of their lawyers who enjoy San Antonio’s lifestyle, and several out-of-town firms that have attempted to enter the market have closed due to a lack of available business.

Bottom line

Texas offers incredible opportunities for outside firms whose clients have strong business ties to the region. And, the fact that there are several large Texas-centric law firms that have strong client bases and excellent profitability has not gone unnoticed by U.K. firms seeking to enter the U.S. in a manner that presents a lower risk factor than New York.

For a detailed discussion of the major Texas cities and the competitive position of individual law firms, see the U.S. Legal Market Analysis.